September 24, 2007

French Dressing

For most people, the alarming thing about a prospective recession is the possibility of losing their jobs or not getting a raise. For me, it's the horrifying thought that I'm going to have to go back to refuting the same tax rationales I was refuting six years ago.

The original reason we needed a tax cut was that a surplus meant taxpayers were overcharged. Then the overcharge disappeared, but we needed a tax cut on account of the recession. Currently, we need tax cuts because the fact that the recession ended means the old tax cuts are working. If the economy tanks, I assume we'll just be told again we can't raise taxes during a recession.

This Orwellian spectacle has grown so familiar that it has simply become an accepted fact of life in Washington. A New York Times article earlier this month called the economic expansion "one of the few positive developments President Bush and the Republican candidates have been able to cite." But, the same article proceeded to explain, "the threat of a recession would make it harder to advocate allowing President Bush's tax cuts to expire, as the lower rates are scheduled to do in 2010, and easier for Republicans to argue that Democratic proposals to raise taxes on the rich risk making the economy worse." So, if the economy keeps growing, it helps the GOP. But, if it stops growing, it hurts the Democrats. Sadly, this is probably an accurate summation of the debate.

Now, to be fair to conservatives, I should point out that no serious person actually believes that long-term tax policy ought to be used to combat a temporary downturn. It's a phony rationale trotted out for the rubes. The more serious rationale for tax cuts is that they can boost long-term growth. This rationale, however, doesn't hold up terribly well, either.

There's no perfect way to test the effect of tax rates, but it's pretty revealing to compare the current economic expansion, under which taxes were cut, with the previous economic expansion, which had a tax hike. Both the Clinton expansion and the Bush expansion featured enormous gains for the very rich. The difference is that the Clinton expansion also produced huge benefits across the income spectrum, while the Bush expansion has not.

The most common measure of how average people have fared is median household income, which captures gains by families right in the middle. From the peak of the previous business cycle, in 1989, to the peak of the Clinton-era business cycle, which ended in 1999, median household income rose by 8.5 percent. During the Bush-era business cycle, median family income has actually fallen, by 2.8 percent. This is extremely bad.

Once again, let's try to be fair to Republicans. It's not really Bush's fault that his economic recovery has done far worse than Clinton's. (And, who knows, maybe it will keep going for a few years and start producing real wage gains.) Sure, I think Clinton's mix of deficit reduction, free trade, and public investment did more to foster growth than Bush's mix of tax cuts and corporate pork. But I'm willing to concede that policies probably played only a small role, and we can't give Clinton that much credit, or Bush much blame, for their economic performance. Neither the Clinton tax hike nor the Bush tax cuts probably did much to the overall economy.

If we concede this, though, then we've knocked down the central justification for GOP policies, which is that tax cuts have enormous effects on the economy. If economic growth is mostly driven by things other than fiscal policy, then we can return to the slightly higher upper-bracket tax rates of the Clinton era and have lower deficits, stronger government benefits for the non-rich, with little or no trade-off for economic growth.

So the conservative argument fundamentally depends upon denying the 1990s. There is a two-step process here. The first step is deviously brilliant: Insist that undoing the Bush tax cuts would be some radical new left-wing experiment that's never been tried before in this country. When Hillary Clinton proposed to restore the top tax rate to where it stood before 2001, Lawrence Kudlow fulminated, "This is France before Sarzoky stuff." Mitt Romney said, "I don't think that her platform would get her elected president of France, let alone president of this country." (This was in keeping with the line of attack a Romney strategy document neatly summarized as "Hillary=France.") Now, you might think that, if any comparison could be drawn from a plan to bring tax rates in the United States back to where they were in the '90s, it would be to ... the United States in the '90s. But conservatives understand that this would not be sufficiently frightening, so they've decided that France is the more apt parallel.

Having successfully severed the '90s from the administration that presided over them, the second step is to suture those years onto the Republican record. Numerous conservatives, most prominently Kudlow, have begun speaking of the "twenty-five-year Reagan boom." (Note that conservatives like Kudlow are able to assert this while simultaneously asserting that, if we reinstated the policies that held sway during the most prosperous stretch of that 25-year boom, we would be just like France.)

A related trick is to find ever more statistically creative ways of giving George W. Bush credit for the '90s. Earlier this year, Republican Senator Judd Gregg asked the Congressional Budget Office to calculate how low-income families with children fared since 1991. Why since 1991? That way it would lump together eight years of low-wage growth with the four years of low-wage decline that followed. Sure enough, the study found those families enjoyed sharply higher income through the '90s and then have seen their income drop ever since. The Wall Street Journal editorial page seized upon this finding to declare that "the poor have been getting less poor."

Earlier this summer, visiting American Enterprise Institute scholar Arthur C. Brooks pulled the same trick. He triumphantly noted that poor- and middle- income workers have seen their incomes rise "between 1993 and 2003"--yes, eight of those ten years took place on Clinton's watch, before incomes for the poor started to drop--then proceeded to flay liberals for being obsessed with inequality. This elementary-level statistical legerdemain was considered so insightful that both City Journal and the Journal editorial page decided to print it. Perhaps those esteemed right-wing publications will also be interested to learn that Barry Bonds and I have combined to hit 762 home runs, which surely qualifies me as the greatest baseball player of all time.